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TRANSPORTATION LAW

A.CIVIL CODE PROVISIONS ON TRANSPORTATION LAW

ARTICLE 1732.Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public.

ARTICLE 1733.Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case.

Such extraordinary diligence in the vigilance over the goods is further expressed in articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is further set forth in articles 1755 and 1756.

The test to determine a common carrier is "whether the given undertaking is a part of the business engaged in by the carrier which he has held out to the general public as his occupation rather than the quantity or extent of the business transacted." . . .

Planters Products, Inc. vs. Court of Appeals, G.R. No. 101503, September 15, 1993

Estrellita M. Bascos vs. Court of Appeals, G.R. No. 101089, April 7, 1993

Article 1732 makes no distinction between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity (in local idiom, as "a sideline"). Article 1732 also carefully avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis. Neither does Article 1732 distinguish between a carrier offering its services to the "general public," i.e., the general community or population, and one who offers services or solicits business only from a narrow segment of the general population

First Phil. Industrial Corp. vs. Court of Appeals, G.R. No. 125948, December 29, 1998

National Steel Corp. vs. Court of Appeals, G.R. No. 112287 & 112350, December 12, 1997

Engracio Fabre, Jr. vs. Court of Appeals, G.R. No. 111127, July 26, 1996

It is not necessary that the carrier be issued a certificate of public convenience, and this public character is not altered by the fact that the carriage of the goods in question was periodic, occasional, episodic or unscheduled

Asia Lighterage and Shipping, Inc. vs. Court of Appeals, G.R. No. 147246, August 19, 2003

Philippine American General Insurance Company vs. PKS Shipping Company, G.R. No. 149038, April 9, 2003

FGU Insurance Corp. vs. G.P. Sarmiento Trucking Corp., G.R. No. 141910. August 6, 2002

Virgines Calvo vs. UCPB General Insurance Co., G.R. No. 148496. March 19, 2002

Loadstar Shipping Co. vs. Court of Appeals, G.R. No. 131621. September 28, 1999

A freight forwarder's liability is limited to damages arising from its own negligence, including negligence in choosing the carrier; however, where the forwarder contracts to deliver goods to their destination instead of merely arranging for their transportation, it becomes liable as a common carrier for loss or damage to goods. A freight forwarder assumes the responsibility of a carrier, which actually executes the transport, even though the forwarder does not carry the merchandise itself.

Unsworth Transport International (Phils.), Inc. vs. Court of Appeals, et al., G.R. No. 166250, July 26, 2010

Art. 1733 - Common carriers are bound to observe extraordinary diligence

Virgines Calvo vs. UCPB General Insurance Co., G.R. No. 148496. March 19, 2002

Phil-Am General Insurance Co., Inc. vs. Court of Appeals, G.R. No. 116940, June 11, 1997

Trans-Asia Shipping Lines vs. Court of Appeals, G.R. No. 118126, March 4, 1996


American Home Assurance, Co. vs. Court of Appeals, G.R. No. 94149, May 5, 1992

Heirs of Amparo De Los Santos vs. Court of Appeals, G.R. No. 51165, June 21, 1990

Philippine Air Lines, Inc. vs. Court of Appeals, G.R. No. L-46558, July 31, 1981

Common carriers are bound to observe extraordinary diligence over the goods they transport.

We need only to stress that from the nature of their business and for reasons of public policy, common carriers are bound to observe extraordinary diligence over the goods they transport according to all the circumstances of each case. In the event of loss, destruction or deterioration of the insured goods, common carriers are responsible, unless they can prove that the loss, destruction or deterioration was brought about by the causes specified in Article 1734 of the Civil Code. In all other cases, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence.

Aboitiz Shipping Corp. vs. New India Assurance Co., Ltd., G.R. No. 156978, August 24, 2007

A common carrier and, as such, is obliged to exercise extraordinary diligence in transporting its passengers safely.

Victory Liner, Inc. vs. Pablo Race, G.R. No. 164820, December 8, 2008

A common carrier, from the nature of its business and for reasons of public policy, is bound to observe extraordinary diligence for the safety of the passengers it transports.

Armando G. Yrasuegui vs. Philippine Airlines, Inc., G.R. No. 168081, October 17, 2008

A common carrier is bound by law to exercise extraordinary diligence and utmost care in ensuring for the safety and welfare of its passengers with due regard for all the circumstances.

Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 123238, September 22, 2008

Mere proof of delivery of the goods in good order to a common carrier and of their arrival in bad order at their destination constitutes a prima facie case of fault or negligence against the carrier. If no adequate explanation is given as to how the deterioration, loss, or destruction of the goods happened, the transporter shall be held responsible.


Art. 1734 - When common carriers are not responsible for loss, destruction, or deterioration of goods

Iron Bulk Shipping Phil., Co., Ltd. vs. Remington Industrial Sales Corp., G.R. No. 136960, December 8, 2003

DSR-Senator Lines vs. Federal Phoenix Assurance Co., Inc., G.R. No. 135377, October 7, 2003

Asia Lighterage and Shipping, Inc. vs. Court of Appeals, G.R. No. 147246, August 19, 2003

Phil. American General Insurance vs. MGG Marine Services, G.R. No. 135645, March 8, 2002

Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, July 12, 1994



Art. 1735 - When common carriers are presumed to have been at fault or to have acted negligently

Presumption of Fault or Negligence by Common Carriers

A business intended to serve the travelling public primarily, a contract of carriage is imbued with public interest. The law governing common carriers consequently imposes an exacting standard. Article 1735 of the Civil Code provides that in case of lost or damaged goods, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as required by Article 1733. Thus, in an action based on a breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was at fault or was negligent. All that he has to prove is the existence of the contract and the fact of its non-performance by the carrier.

Air France vs. Bonifacio H. Gillego, G.R. No. 165266, December 15, 2010

Aboitiz Shipping Corp. vs. Insurance Company of North America, G.R. No. 168402, August 6, 2008

Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, July 12, 1994

Home Insurance Corp. vs. Court of Appeals, G.R. No. 109293, August 18, 1993

Extraordinary diligence must include safeguarding the shipment from damage coming from natural elements such as rainfall.

Aboitiz Shipping Corp. vs. Insurance Co. of North America, G.R. No. 168402, August 6, 2008

Art. 1736 - Extraordinary responsibility of common carriers

Art. 1736 - Extraordinary responsibility of common carriers

Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 80936, October 17, 1990

Explicit is the rule under Article 1736 of the Civil Code that the extraordinary responsibility of the common carrier begins from the time the goods are delivered to the carrier. This responsibility remains in full force and effect even when they are temporarily unloaded or stored in transit, unless the shipper or owner exercises the right of stoppage in transitu, and terminates only after the lapse of a reasonable time for the acceptance of the goods by the consignee or such other person entitled to receive them. And, there is delivery to the carrier when the goods are ready for and have been placed in the exclusive possession, custody and control of the carrier for the purpose of their immediate transportation and the carrier has accepted them. Where such a delivery has thus been accepted by the carrier, the liability of the common carrier commences eo instanti.

Benito Macam vs. Court of Appeals, G.R. No. 125524, August 25, 1999

Aniceto G. Saludo, Jr. vs. Court of Appeals, G.R. No. 95536, March 23, 1992

Art. 1739 - Common carrier must exercise due diligence to prevent or minimize loss before, during and after natural disaster to be exempt from liability

Art. 1739 - Common carrier must exercise due diligence to prevent or minimize loss before, during and after natural disaster to be exempt from liability

Alejandro Arada vs. Court of Appeals, G.R. No. 98243, July 1, 1992

Eastern Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R. No. L-69044. May 29, 1987

Art. 1742 - Common carrier must exercise due diligence to forestall or lessen loss

Art. 1742 - Common carrier must exercise due diligence to forestall or lessen loss

Iron Bulk Shipping Phil., Co., Ltd. vs. Remington Industrial Sales Corp., G.R. No. 136960, December 8, 2003

Art. 1744 - Stipulation limiting liability of common carrier to degree less than extraordinary diligence

Art. 1744 - Stipulation limiting liability of common carrier to degree less than extraordinary diligence

Samar Mining Co., Inc. vs. Nordeutscher Lloyd, G.R. No. L-28673. October 23, 1984

Amparo Servando vs. Phil. Steam Navigation Co., G.R. Nos. L-36481-2. October 23, 1982

It is to be noted that the Civil Code does not limit the liability of the common carrier to a fixed amount per package. In all matters not regulated by the Civil Code, the rights and obligations of common carriers are governed by the Code of Commerce and special laws. Thus, the COGSA supplements the Civil Code by establishing a provision limiting the carrier's liability in the absence of a shipper's declaration of a higher value in the bill of lading.


Art. 1745 - Stipulations considered unreasonable, unjust and contrary to public policy

Valenzuela Hardwood and Industrial Supply vs. Court of Appeals, G.R. No. 102316, June 30, 1997

Estrellita M. Bascos vs. Court of Appeals, G.R. No. 101089, April 7, 1993

Pedro de Guzman vs. CA and Ernesto Cendaa, G.R. No. L-47822, December 22, 1988

Art. 1749 - Stipulation limiting common carrier's liability to value of goods appearing in bill of lading

Art. 1749 - Stipulation limiting common carrier's liability to value of the goods appearing in bill of lading

Phil. Charter Insurance Corp. vs. Neptune Orient Lines, et al., G.R. No. 145044, June 12, 2008

Yao Ka Sin Trading vs. Court of Appeals, G.R. No. 53820, June 15, 1992

A stipulation in the bill of lading limiting the common carrier's liability for loss or destruction of a cargo to a certain sum, unless the shipper or owner declares a greater value, is sanctioned by law.

Philippine Charter Insurance Corp. vs. Neptune Orient Lines, et al., G.R. No. 145044, June 12, 2008

A bill of lading is a written acknowledgement of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named or on his or her order. It operates both as a receipt and as a contract. It is a receipt for the goods shipped and a contract to transport and deliver the same as therein stipulated. As a receipt, it recites the date and place of shipment, describes the goods as to quantity, weight, dimensions, identification marks, condition, quality, and value. As a contract, it names the contracting parties, which include the consignee; fixes the route, destination, and freight rate or charges; and stipulates the rights and obligations assumed by the parties.


Art. 1750 - Contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods, when valid

Phil. Charter Insurance Corp. vs. Neptune Orient Lines, et al., G.R. No. 145044, June 12, 2008

A stipulation in the bill of lading limiting the common carrier's liability for loss or destruction of a cargo to a certain sum, unless the shipper or owner declares a greater value, is sanctioned by law.

Philippine Charter Insurance Corp. vs. Neptune Orient Lines, et al., G.R. No. 145044, June 12, 2008

Art. 1753 - Governing law


Maritime Company of the Phils. vs. Court of Appeals, G.R. No. 47004, March 8, 1989

Eastern Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R. No. L-69044. May 29, 1987

Art. 1755 - Duty of common carrier for safety of passengers

Japan Airlines vs. Jesus Simangan, G.R. No. 170141, April 22, 2008

Fortune Express vs. Court of Appeals, G.R. No. 119756, March 18, 1999


Dangwa Transportation Co., Inc. vs. Court of Appeals, G.R. No. 95582, October 7, 1991


Kapalaran Bus Line vs. Angel Coronado, G.R. No. 85331, August 25, 1989


A common carrier is bound by law to exercise extraordinary diligence and utmost care in ensuring for the safety and welfare of its passengers with due regard for all the circumstances.

Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 123238, September 22, 2008

A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances.



Art. 1756 - Common carriers presumed at fault or negligent in case of death of or injuries to passengers


Batangas Laguna Tayabas Bus Co. vs. Intermediate Appellate Court, G.R. Nos. 74387-90, Nov. 14, 1988


Art. 1759 - When common carriers are liable for negligence or wilful acts of its employees

Baliwag Transit, Inc. vs. Court of Appeals, G.R. No. 116110, May 15, 1996

Art. 1762 - Contributory negligence of passenger

Philippine National Railways vs. Court of Appeals, G.R. No. L-55347. October 4, 1985

Art. 1763 - When common carrier is responsible for wilful acts or negligence of other passengers or of strangers


Jose Pilapil vs. Court of Appeals, G.R. No. 52159. December 22, 1989

A common carrier is bound to carry its passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with due regard for all the circumstances.


Art. 1764 - Damages against common carriers




Suplicio Lines, Inc. vs. Court of Appeals, G.R. No. 113578, July 14, 1995

Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. 54470, May 8, 1990

The "receipt by a person of a share in the profits of a business is prima facie evidence that he is a partner in the business."

Philex Mining Corp. vs. CIR, G.R. No. 148187, April 16, 2008

As a general rule, moral damages are not recoverable in actions for damages predicated on a breach of contract, unless there is fraud or bad faith. As an exception, moral damages may be awarded in case of breach of contract of carriage that results in the death of a passenger, in accordance with Article 1764, in relation to Article 2206 (3) of the Civil Code.

[Articles 1764 and 2206] set forth the persons entitled to moral damages. The omission from Article 2206 (3) of the brothers and sisters of the deceased passenger reveals the legislative intent to exclude them from the recovery of moral damages for mental anguish by reason of the death of the deceased. Inclusio unius est exclusio alterius.

Sulpicio Lines, Inc. vs. Domingo E. Curso, et al., G.R. No. 157009, March 17, 2010

As a general rule, indeed, moral damages are not recoverable in an action predicated on a breach of contract. This is because such action is not included in Article 2219 of the Civil Code as one of the actions in which moral damages may be recovered. By way of exception, moral damages are recoverable in an action predicated on a breach of contract: (a) where the mishap results in the death of a passenger, as provided in Article 1764, in relation to Article 2206 (3), of the Civil Code; and (b) where the common carrier has been guilty of fraud or bad faith, as provided in Article 2220 of the Civil Code.

Philtranco Service Enterprises, Inc. vs. Felix Paras, et al., G.R. No. 161909, April 25, 2012

WARSAW CONVENTION

Warsaw Convention" means the Convention for the Unification of Certain Rules Relating to International Carriage by Air signed at Warsaw on 12 October 1929, or the Warsaw Convention as amended at The Hague, 1955.

ARTICLE 1.(1) This convention shall apply to all international transportation of persons, baggage, or goods performed by aircraft for hire. It shall apply equally to gratuitous transportation by aircraft performed by an air transportation enterprise.

(2)For the purposes of this convention the expression "international transportation" shall mean any transportation in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a break in the transportation or a transshipment, are situated either within the territories of two High Contracting Parties, or within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandate or authority of another power, even though that power is not a party to this convention. Transportation without such an agreed stopping place between territories subject to the sovereignty, suzerainty, mandate, or authority of the same High Contracting Party shall not be deemed to be international for the purposes of this convention.

(3)Transportation to be performed by several successive air carriers shall be deemed, for the purposes of this convention, to be one undivided transportation, if it has been regarded by the parties as a single operation, whether it has been agreed upon under the form of a single contract or of a series of contracts, and it shall not lose its international character merely because one contract or a series of contracts is to be performed entirely within a territory subject to the sovereignty, suzerainty, mandate, or authority of the same High Contracting Party.

SUPPLEMENTARY CONVENTION FOR THE UNIFICATION OF CERTAIN RULES RELATING TO INTERNATIONAL CARRIAGE BY AIR PERFORMED BY A PERSON OTHER THAN THE CONTRACTING CARRIER * (1961)

"Contracting carrier" means a person who as a principal makes an agreement for carriage governed by the Warsaw Convention with a passenger or consignor or with a person acting on behalf of the passenger or consignor;

"Actual carrier" means a person, other than the contracting carrier, who, by virtue of authority from the contracting carrier, performs the whole or part of the carriage contemplated in paragraph (b) but who is not with respect to such part a successive carrier within the meaning of the Warsaw Convention. Such authority is presumed in the absence of proof to the country.ARTICLE IIIf an actual carrier performs the whole or part of carriage which, according to the agreement referred to in Article I, paragraph b), is governed by the Warsaw Convention, both the contracting carrier and the actual carrier shall, except as otherwise provided in this Convention, be subject to the rules of the Warsaw Convention, the former for the whole of the carriage contemplated in the agreement, the latter solely for the carriage which he performs.ARTICLE III1.The acts and omissions of the actual carrier and of his servants and agents acting within the scope of their employment shall, in relation to the carriage performed by the actual carrier, be deemed to be also those of the contracting carrier.

2.The acts and omissions of the contracting carrier and of his servants and agents acting within the scope of their employment shall, in relation to the carriage performed by the actual carrier, be deemed to be also those of the actual carrier. Nevertheless, no such act or omission shall subject the actual carrier to liability exceeding the limits specified in Article 22 of the Warsaw Convention. Any special agreement under which the contracting carrier assumes obligations not imposed by the Warsaw Convention or any waiver of rights conferred by that Convention or any special declaration of interest in delivery at destination contemplated in Article 22 of the said Convention, shall not affect the actual carrier unless agreed to by him.ARTICLE IVAny complaint to be made or order to be given under the Warsaw Convention to the carrier shall have the same effect whether addressed to the contracting carrier or to the actual carrier. Nevertheless, orders referred to in Article 12 of the Warsaw Convention shall only be effective if addressed to the contracting carrier.ARTICLE VIn relation to the carriage performed by the actual carrier, any servant or agent of that carrier or of the contracting carrier shall, if he proves that he acted within the scope of his employment, be entitled to avail himself of the limits of liability which are applicable under this Convention to the carrier whose servant or agent he is unless it is proved that he acted in a manner which, under the Warsaw Convention, prevents the limits of liability from being invoked.ARTICLE VI

In relation to the carriage performed by the actual carrier, the aggregate of the amounts recoverable from that carrier and the contracting carrier, and from their servants and agents acting within the scope of their employment, shall not exceed the highest amount which could be awarded against either the contracting carrier or the actual carrier under this Convention, but none of the persons mentioned shall be liable for a sum in excess of the limit applicable to him.

ARTICLE VII

In relation to the carriage performed by the actual carrier, an action for damage may be brought, at the option of the plaintiff, against the carrier or the contracting carrier, or against both together or separately. If the action is brought against only one of those carriers, that carrier shall have the right to require the other carrier to be joined in the proceedings, the procedure and effects being governed by the law of the court seized of the case.

ARTICLE VIII

Any action for damages contemplated in Article VII of this Convention must be brought, at the option of the plaintiff, either before a court in which an action may be brought against the contracting carrier, as provided in Article 28 of the Warsaw Convention, or before the court having jurisdiction at the place where the actual carrier is ordinarily resident or has his principal place of business.

ARTICLE IX

1.Any contractual provision tending to relieve the contracting carrier or the actual carrier of liability under this Convention or to fix a lower limit than that which is applicable according to this Convention shall be null and void, but the nullity of any such provision does not involve the nullity of the whole agreement, which shall remain subject to the provisions of this Convention.

2.In respect of the carriage performed by the actual carrier, the preceding paragraph shall nor apply to contractual provisions governing loss or damage resulting from the inherent defect, quality or vice of the cargo carried.

3.Any clause contained in an agreement for carriage and all special agreements entered into before the damage occurred by which the parties purport to infringe the rules laid down by this Convention, whether by deciding the law to be applied, or by altering the rules as to jurisdiction, shall be null and void. Nevertheless, for the carriage of cargo arbitration clauses are allowed, subject to the Convention, if the arbitration is to take place in one of the jurisdictions referred to in Article VIII.

[G.R. No. 171092. March 15, 2010.], EDNA DIAGO LHUILLIER, petitioner, vs. BRITISH AIRWAYS, respondent.It is settled that the Warsaw Convention has the force and effect of law in this country. In Santos III v. Northwest Orient Airlines, we held that:The Republic of the Philippines is a party to the Convention for the Unification of Certain Rules Relating to International Transportation by Air, otherwise known as the Warsaw Convention. It took effect on February 13, 1933. The Convention was concurred in by the Senate, through its Resolution No. 19, on May 16, 1950. The Philippine instrument of accession was signed by President Elpidio Quirino on October 13, 1950, and was deposited with the Polish government on November 9, 1950. The Convention became applicable to the Philippines on February 9, 1951. On September 23, 1955, President Ramon Magsaysay issued Proclamation No. 201, declaring our formal adherence thereto, "to the end that the same and every article and clause thereof may be observed and fulfilled in good faith by the Republic of the Philippines and the citizens thereof."The Convention is thus a treaty commitment voluntarily assumed by the Philippine government and, as such, has the force and effect of law in this country.

Thus, when the place of departure and the place of destination in a contract of carriage are situated within the territories of two High Contracting Parties, said carriage is deemed an "international carriage". The High Contracting Parties referred to herein were the signatories to the Warsaw Convention and those which subsequently adhered to it.Warsaw Convention governs actions arising from international air travel and provides the exclusive remedy for conduct which falls within its provisions." It further held that the said Convention "created no exception for an injury suffered as a result of intentional conduct"

which in that case involved a claim for intentional infliction of emotional distress.It is thus settled that allegations of tortious conduct committed against an airline passenger during the course of the international carriage do not bring the case outside the ambit of the Warsaw Convention.[G.R. Nos. 116044-45. March 9, 2000.],AMERICAN AIRLINES, petitioner, vs. COURT OF APPEALS, HON. BERNARDO LL. SALAS and DEMOCRITO MENDOZA, respondents.

Art 1(3) of the Warsaw Convention which states:"Transportation to be performed by several successive carriers shall be deemed, for the purposes of this convention, to be one undivided transportation, if it has been regarded by the parties as a single operation, whether it has been agreed upon under the form of a single contract or a series of contracts, and it shall not lose its international character merely because one contract or series of contracts is to be performed entirely within the territory subject of the sovereignty, suzerainty, mandate or authority of the same High Contracting Party."The quoted provision of the Warsaw Convention Art. 1(3) clearly states that a contract of air transportation is taken as a single operation whether it is founded on a single contract or a series of contracts. The number of tickets issued does not detract from the oneness of the contract of carriage as long as the parties regard the contract as a single operation. The evident purpose underlying this Article is to promote international air travel by facilitating the procurement of a series of contracts for air transportation through a single principal and obligating different airlines to be bound by one contract of transportation. Petitioner's acquiescence to take the place of the original designated carrier binds it under the contract of carriage entered into by the private respondent and Singapore Airlines in Manila.The contract of carriage between the private respondent and Singapore Airlines although performed by different carriers under a series of airline tickets, including that issued by the petitioner, constitutes a single operation. Members of the IATA are under a general pool partnership agreement wherein they act as agent of each other in the issuance of tickets to contracted passengers to boost ticket sales worldwide and at the same time provide passengers easy access to airlines which are otherwise inaccessible in some parts of the world. Booking and reservation among airline members are allowed even by telephone and it has become an accepted practice among them. A member airline which enters into a contract of carriage consisting of a series of trips to be performed by different carriers is authorized to receive the fare for the whole trip and through the required process of interline settlement of accounts by way of the IATA clearing house an airline is duly compensated for the segment of the trip serviced.[G.R. No. 119641. May 17, 1996.],PHILIPPINE AIRLINES, INC., petitioner, vs. COURT OF APPEALS, DR. JOSEFINO MIRANDA and LUISA MIRANDA, respondents.

Although the Warsaw Convention has the force and effect of law in this country, being a treaty commitment assumed by the Philippine government, said convention does not operate as an exclusive enumeration of the instances for declaring a carrier liable for breach of contract of carriage or as an absolute limit of the extent of that liability. The Warsaw Convention declares the carrier liable in the enumerated cases and under certain limitations. However, it must not be construed to preclude the operation of the Civil Code and pertinent laws. It does not regulate, much less exempt, the carrier from liability for damages for violating the rights of its passengers under the contract of carriage, especially if willful misconduct on the part of the carrier's employees is found or established. (Cathay Pacific Airways, Ltd. vs. Court of Appeals, et al., G.R. No. 60501, March 5, 1993CARRIAGE OF GOODS BY SEA ACT (COGSA)Covers only overseas trade.

It does not apply to undelivered or lost goods.

An action to recover based on COGSA must be filed within a period of one (1) year from discharge; if there is no delivery, the one year period starts from the day the vessel left port in case of undelivered or lost cargo, or from delivery to the arrastre, in case of damaged goods[G.R. No. 119571. March 11, 1998.],MITSUI O.S.K. LINES LTD., represented by MAGSAYSAY AGENCIES, INC., petitioner, vs. COURT OF APPEALS and LAVINE LOUNGEWEAR MFG. CORP., respondents.

Petitioner is a foreign corporation represented by its agent, Magsaysay Agencies. It entered into a contract of carriage with private respondent Lavine Mfg. Co. to transport goods of the latter from Manila to France. Petitioner failed in its undertaking to transport the goods in 28 days from initial loading, hence, private respondent filed a case for the recovery of damages before the RTC. Petitioner moved for the dismissal of the complaint alleging that private respondent cause of action had prescribed under the Carriage of Goods by Sea Act (COGSA). It was denied by the RTC. On petition for certiorari, the Court of Appeals sustained the trial court's order. Hence this petition raising the issue of whether or not private respondent's action is for "loss or damage" to goods shipped, within the meaning of COGSA. Precisely, the question before the trial court is not the particular scene of "damages" as it refers to the physical loss or damage of a shipper's goods as specifically covered by 3(6) of COGSA but petitioner's potential liability for the damages it has caused in the general sense and, as such, the matter is governed by the Civil Code, the Code of Commerce and COGSA, for the breach of its contract of carriage with private respondent.Supreme Court concluded by holding that as the suit below is not for "loss or damage" to goods contemplated in 3(6), the question of prescription of action is governed not by the COGSA but by Art. 1144 of the Civil Code which provides for a prescriptive period of ten years. As defined in the Civil Code and as applied to Section 3(6), paragraph 4 of the Carriage of Goods by Sea Act, "loss" contemplates merely a situation where no delivery at all was made by the shipper of the goods because the same has perished, gone out of commerce, or disappeared in such a way that their existence is unknown or they cannot be recovered. Conformably with this concept of what constitutes "loss" or "damage," this Court held in another case that the deterioration of goods due to delay in their transportation constitutes "loss" or "damage" within the meaning of 3(6), so that as suit was not brought within one year the action was barred.In the case at bar, there is neither deterioration nor disappearance nor destruction of goods caused by the carrier's breach of contract. Whatever reduction there may have been in the value of the goods is not due to their deterioration or disappearance because they had been damaged in transit. Indeed, what is in issue in this petition is not the liability of petitioner for its handling of goods as provided by 3(6) of the COGSA, but its liability under its contract of carriage with private respondent as covered by laws of more general application. Precisely, the question before the trial court is not the particular sense of "damages" as it refers to the physical loss or damage of a shipper's goods as specifically covered by 3(6) of COGSA but petitioner's potential liability for the damages it has caused in the general sense and, as such, the matter is governed by the Civil Code, the Code of Commerce and COGSA, for the breach of its contract of carriage with private respondent. We concluded by holding that as the suit below is not for "loss or damage" to goods contemplated in 3(6), the question of prescription of action is governed not by the COGSA but by Art. 1144 of the Civil Code which provides for a prescriptive period of ten years. [G.R. No. 166250. July 26, 2010.],UNSWORTH TRANSPORT INTERNATIONAL (PHILS.), INC., petitioner, vs. COURT OF APPEALS and PIONEER INSURANCE AND SURETY CORPORATION, respondents.

It is to be noted that the Civil Code does not limit the liability of the common carrier to a fixed amount per package. In all matters not regulated by the Civil Code, the rights and obligations of common carriers are governed by the Code of Commerce and special laws. Thus, the COGSA supplements the Civil Code by establishing a provision limiting the carrier's liability in the absence of a shipper's declaration of a higher value in the bill of lading. 30 Section 4 (5) of the COGSA provides:(5) Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package of lawful money of the United States, or in case of goods not shipped in packages, per customary freight unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading. This declaration, if embodied in the bill of lading, shall be prima facie evidence, but shall not be conclusive on the carrier.

LETTERS OF CREDIT

a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee.

Two Essential Conditions for a Letter of Credit

A letter of credit is issued in favor of a definite person and not to order. It is not a negotiable instrument governed by the Negotiable Instruments Law. It is limited to specified amount, which may be one or more but always with a maximum amount.

If any of the two circumstances is missing, it is not a letter of credit. It is a mere recommendation.

Parties to a Letter of Credit

1. Issuer This is the entity that will issue the credit. It usually is a bank but it can be any financial institution of substance. The issuer assumes the full obligation topay the beneficiary upon the presentation of the documents specified in the credit.

2. Applicant The applicant is also known as the account party or customer. He requests from the issuer the credit he wants for his beneficiary. He pays the issuer for the credit with cash or collateral so as to secure the issuer the funds necessary for the reimbursement obligation to the beneficiary.

3. Beneficiary The beneficiary is the party that will be identified in the credit as the entity entitled to draw or demand payment under the letter of credit.

4. Advising Bank The role of the advising bank is to notify the beneficiary that a credit has been issued by another bank. It assumes no responsibility other than notifying the beneficiary. However, its obligation is limited to accurately advising the terms of the credit that has been issued. In this capacity it is only playing post office.

5. Confirming Bank The responsibility of the confirming bank is that it becomes directly obligated on the credit and now assumes the rights and obligations of the issuer. Typically the confirming banks role is one for geographic convenience, i.e., a bank located close to the beneficiary. However, it can also be a well-known bank, that will assume the responsibility for a lesser known bank by confirming their credit, therefore, rendering the credit more acceptable to the beneficiary.

Important Doctrines in Letters of Credit

1. Independence Rule This principle of independence clearly states that the obligation of the paying bank is in reading the text of the credit which is wholly independent from sales or other contracts on which the credit may be based. The issuing bank is not required to evaluate if the beneficiary has performed under the underlying contract or if it is contractually entitled to payment. The issuer is only obligated to pay upon presentation of documents that conform to the requirements of the letter of credit.

Transfield Philippines vs Luzon Hydro Electric Corp.(GR No 146717, Nov 22, 2004, Tinga)

Transfield entered into a turn-key contract with Luzon Hydro Corp. (LHC). Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. The contract provides for a period for which the project is to be completed and also allows for the extension of the period provided that the extension is based on justifiable grounds such as fortuitous event. In order to guarantee performance by Transfield, two stand-by letters of credit were required to be opened. During the construction of the plant, Transfield requested for extension of time citing fortuitous evennts brought about by typhoon, barricades and demonstration. LHC did not give due course to the extension of the period prayed for but referred the matter to arbitration committee.

In the meanwhile, because of the delay in the construction of the plant, LHC called on the stand-by letters of credit because of default. However, the demand was objected by Transfield on the ground that there is still pending arbitration on their request for extension of time. LHC invoked the independence principle. On the other hand, Transfield claims fraud on the part of LHC on calling the stand-by letters of credit.

Under the independence principle, a LC accommodation is entirely distinct and separate, independent agreement. It is not supposed to be affected by the main contract upon which it rests.

2. Strict Compliance Rule The beneficiary must make presentment in strict compliance with the terms, conditions and procedures of the credit. Further to this, since the adherence of the requirements must be strictly applied to the beneficiary, the beneficiary must know precisely and unequivocally what those requirements are. 3. Fraud Exception Principle -exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.JURISPRUDENCE

LETTERS OF CREDIT

1.[G.R. No. 187919. April 25, 2012.],RAFAEL H. GALVEZ and KATHERINE L. GUY, petitioners, vs. HON. COURT OF APPEALS and ASIA UNITED BANK, respondents.

- Effect of fraudulent misrepresentation in applying and being issued a Letter of Credit.

-It is true that ordinarily, in a letter of credit transaction, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers, who in turn promises to pay the bank the amount of funds mentioned in the letters of credit plus credit or commitments fees mutually agreed upon. Once the issuing bank shall have paid the beneficiary after the latter's compliance with the terms of the letter of credit, the issuing bank is entitled to reimbursement for the amount it paid under the letter of credit.

In the present case, however, no reimbursement was made outright, precisely because the letter of credit was secured by a promissory note executed by SPI. The bank would have not agreed to this transaction had it not been deceived by Gilbert Guy, et al. into believing the RMSI and SPI were one and the same entity. Guy and his cohorts' acts in (1) securing the letter of credit guaranteed by a promissory note in behalf of SPI; and, (2) their act of representing SPI as RMSI's Division, were indicia of fraudulent acts because they fully well know, even before transacting with the bank, that: (a) SPI was a separate entity from Smartnet Philippines, the RMSI's Division, which has the Omnibus Credit Line; and (b) despite this knowledge, they misrepresented to the bank that SPI is RMSI's division. Had it not for this false representation, AUB would have not granted SPI's letter of credit to be secured with a promissory note because SPI as a corporation has no credit line with AUB and SPI by its own, has no credit standing.2.[G.R. No. 105395. December 10, 1993.],BANK OF AMERICA, NT & SA, petitioner, vs. COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents.- On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary. prcd

On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting, along with the bank's communication, the letter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did not. Reynaldo Dueas, bank employee in charge of letters of credit, however, explained to Atty. Tanay that there was no need for confirmation because the letter of credit would not have been transmitted if it were not genuine.

Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter of credit by submitting to Bank of America invoices, covering the shipment of 24,000 bales of polyethylene rope to General Chemicals valued at US$1,320,600.00, the corresponding packing list, export declaration and bill of lading. Finally, after being satisfied that Inter-Resin's documents conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage and mail insurance."1 The check was picked up by Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the corresponding reimbursement therefor.

Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second availment under the same letter of credit consisting of a packing list, bill of lading, invoices, export declaration and bills in set, evidencing the second shipment of goods. Immediately upon receipt of a telex from Bank of Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of credit. 3 Bank of America kept Inter-Resin informed of the developments. Sensing a fraud, Bank of America sought the assistance of the National Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were sent to Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated Inter-Resin's President Francisco Trajano and Executive Vice President Barcelina Tio, who, thereafter, were criminally charged for estafa through falsification of commercial documents. The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found no prima facie evidence to warrant prosecution.

Bank of America sued Inter-Resin for the recovery of P10,219,093.20 the peso equivalent of the draft for US$320,600.00 on the partial availment of the now disowned letter of credit. On the other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20 on its first shipment but also to the balance US$1,461,400.00 covering the second shipment.- A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank.What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called "independence principle," the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not.

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of a confirming bank which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, to have the draft discounted.Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the universal acceptance of the autonomy of contracts rule. The rules were later developed into what is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure, there are other principles, which, although part of lex mercatoria, are not dealt with in the U.C.P. In FEATI Bank and Trust Company v. Court of Appeals, (G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576) the Supreme Court have accepted, to the extent of their pertinency, the application in our jurisdiction of this international commercial credit regulatory set of rules. In Bank of Phil. Islands v. De Nery, (G.R. No. L-24821, 16 October 1970; 35 SCRA 256) the Court has said that the observance of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. The Court have further observed that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the U.C.P. is undeniable.

The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is dependent on the bank's participation in that transaction; as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. Bank of America has, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under the account of General Chemicals (buyer) only means that the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he enclosure is solely an advise of credit opened by the abovementioned correspondent and conveys no engagement by us." This written reservation by Bank of America in limiting its obligation only to being an advising bank is in consonance with the provisions of U.C.P. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters or documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication . . ." As advising bank, Bank of America is bound only to check the "apparent authenticity" of the letter of credit, which it did.

May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents therefor were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America, has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other banks with which to negotiate the draft and the documents.) As a negotiating bank, Bank of America has a right of recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon.

In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents.3.[G.R. No. 160732. June 21, 2004.],METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of Quezon City, Branch 90 and MAYNILAD WATER SERVICES, INC., respondents.

Metropolitan Waterworks and Sewerage System (MWSS) granted Maynilad Water Services, Inc. (Maynilad) a twenty-year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area for which Maynilad undertook to pay the corresponding concession fees. To secure its obligation, Maynilad arranged for a three-year facility with a number of foreign banks, led by Citicorp International Limited, for the issuance of an irrevocable Standby Letter of Credit in the amount of US$120,000,000 in favor of MWSS. Sometime, in September 2000, Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso against the US Dollar. After several negotiations, Maynilad and MWSS amended the Concession Agreement known as Amendment No. 1. However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination claiming that MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1. This matter was brought before the Appeals Panel which ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the concession fees that had fallen due. Maynilad then filed a Petition for Rehabilitation before the Regional Trial Court (RTC) of Quezon City, Branch 90 which resulted to the issuance of the Stay Order which stated, among others, that the court prohibited the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of the petition. Upon ex parte motions filed by Maynilad, herein public respondent, Hon. Reynaldo B. Daway, issued an Order that declared that the act of MWSS in commencing the process for the payment of US$98 million out of the US$120 million standby letter of credit is violative of the court's Stay Order. Thus, MWSS filed the instant petition. It claimed, among others, that public respondent committed grave abuse of discretion in considering the performance bond or assets of the issuing banks as part or property of the estate of Maynilad subject to the in rem rehabilitation jurisdiction of the trial court.

The Court ruled that taking into consideration its own rulings on the nature of letters of credit and the customs and usage developed over the years in the banking and commercial practice of letters of credit, and except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein. The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction. We held in Feati Bank & Trust Company v. Court of Appeals that the concept of guarantee vis-a-vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit.

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter. They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. What distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented to it. They are definite undertakings to pay at sight once the documents stipulated therein are presented.Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.4.[G.R. No. 117913. February 1, 2002.],CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO and ALFONSO CO, petitioners, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

Mico Metals Corporation, through its Vice-President and General Manager, executed a Deed of Real Estate Mortgage over its properties in Pasig, Metro Manila to secure the loans obtained from PBCom. Petitioners sureties, in their personal capacities, executed a surety agreement in favor of PBCom whereby petitioners, jointly and severally, guaranteed the prompt payment on due dates of letters of credits and other obligations of every kind and nature, for which Mico may be held accountable by PBCom. Mico also filed with PBCom applications for domestic and foreign letters of credit which were approved. The aforementioned real estate mortgage was foreclosed and the said mortgaged properties were sold in a public auction for Mico's failure to pay the obligations incurred upon maturity. The proceeds of the purchase price at public auction were applied to the outstanding obligations of Mico, leaving still an unpaid balance which Mico refused to acknowledge. Hence, PBCom filed a complaint for a sum of money with prayer for writ of preliminary attachment before the RTC. Petitioners contended that there was no proof that the proceeds of the loans or the goods under the trust receipts were even delivered to and received by Mico.

The Supreme Court held that the documents presented by private respondent PBCom to prove petitioners' credit availments and liabilities have not merely created a prima facie case but have actually proved the solidary obligation of Mico and the petitioners as sureties of Mico in favor of respondent PBCom. The letters of credit showed that pertinent materials/merchandise have been received by Mico. The drafts signed by the beneficiary/suppliers in connection with the corresponding letters of credit proved that said suppliers were paid by PBCom for the account of Mico.

Parties to a commercial letter of credit include (a) the buyer or the importer, (b) the seller, also referred to as beneficiary, (c) the opening bank which is usually the buyer's bank which actually issues the letter of credit, (d) the notifying bank which is the correspondent bank of the opening bank through which it advises the beneficiary of the letter of credit, (e) negotiating bank which is usually any bank in the city of the beneficiary. The services of the notifying bank must always be utilized if the letter of credit is to be advised to the beneficiary through cable, (f) the paying bank which buys or discounts the drafts contemplated by the letter of credit, if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary. As a rule, whenever the facilities of the opening bank are used, the beneficiary is supposed to present his drafts to the notifying bank for negotiation and (g) the confirming bank which, upon the request of the beneficiary, confirms the letter of credit issued by the opening bank.

From the foregoing, it is clear that letters of credit, being usually bank to bank transactions, involve more than just one bank. Consequently; there is nothing unusual in the fact that the drafts presented in evidence by respondent bank were not made payable to PBCom. As explained by respondent bank, a draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the foreign letter of credit. Having paid the supplier, the Bank of Taiwan then presented the bank draft for reimbursement by PBCom's correspondent bank in Taiwan, the Irving Trust Company which explains the reason why on its face, the draft was made payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft to PBCom. The draft was later transmitted to PBCom to support the latter's claim for payment from MICO. MICO accepted the draft upon presentment and negotiated it to PBCom.

A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral of the merchandise imported or purchased. A trust receipt, therefor, is a document of security pursuant to which a bank acquires a "security interest" in the goods under trust receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a security for the loan. The transaction involves a loan feature represented by a letter of credit, and a security feature which is in the covering trust receipt which secures an indebtedness.5.[G.R. No. 74834. November 17, 1988.],INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL INTERNATIONAL BANK), petitioner, vs. HON. INTERMEDIATE APPELLATE COURT THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA, respondents

Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act).

The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval v. Trask, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains.

The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself supplied. Letters of credit are strictly construed to the end that the rights of those directly parties to them may be preserved and their interest safeguarded (Moss vs. Old Colony Trust Co., 140 N.E. 803, 246 Mass. 138, 152). Like any other writing, it will be construed most strongly against the writer and so as to be reasonable and consistent with honest intentions. On the whole, the construction will be generally a strict one (Lamborn vs. National Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id., 204 N Y.S. 557, 123 Misc. 211, affirmed Id., 148 N.E. 664, 240 N.Y. 520). As found by the Appellate Court, however, the amount payable should not exceed P296,294.05 (P600,000.00 less P303,705.95, the total amount found by the Appellate Court to have been paid by IBAA to Philam Life).WAREHOUSE RECEIPTS OF LAW

Purpose of the Law

1. To prescribe the rights and duties of a warehouseman;2. To regulate the relationship between a warehouseman and:

The depositor of the goods or;

Holder of warehouse receipt for the goods;

The person lawfully entitled to the possession of the goods or Other persons A warehouse receipt is a written acknowledgement by a warehouseman that he has received and held certain goods therein described in store for the person to whom it is issued.

A warehouseman is the person lawfully engaged in the business of storing goods for compensation for such

Kinds

Negotiable - if deliverable to order or to bearer;

Non-negotiable - if deliverable to a specified person. It must be stamped, otherwise warehouseman is liable to person believing it to be negotiable.

Conflicting Claims - remedy of a warehouseman is to file an action for interpleader.

Warehouseman's Lien - this is effective on the goods deposited which operates as a retaining lien until his charges are paid. The lien is lost (a) by surrender of goods, and (b) refusal to deliver goods when demand is proper.Responsibilities of Warehouseman

General Rule

Warehouseman must keep the goods of the depositor separate from the goods of other depositors, or from the goods of the same depositor from a separate receipt Exceptions

1.If the goods are fungible, i.e., any unit of thegoods is, from its nature or by mercantile custom, treated as the equivalent of any other unit

2. The commingling is authorized by agreementor by customWarehousemans Lien

Object of the Lien

on the goods deposited with him or on the proceeds thereof in his hands.

Purpose

for all lawful charges for storage and preservation of goods, money advanced by him in relation to such goods such as expenses of transportation or labor.

Remedies available to warehouseman if charges are not paid1.To refuse to deliver the goods until his lien is satisfied.

2. To sell the goods and apply the proceeds thereof to the value of the lien.

3. To institute an action for collection judicially.WAREHOUSE RECEIPTS LAW

1.[G.R. Nos. 21000, 21002-21004 & 21006. December 20, 1924.],In the matter of the involuntary insolvency of UMBERTO de POLI. BANK OF THE PHILIPPINE ISLANDS ET AL., claimants-appellees, vs. J. R. HERRIDGE, assignee of the insolvent estate of U. de Poli, BOWRING & CO., C.T. BOWRING & CO., LTD., AND T. T. YANGCO, creditors-appellants.

Whenever possible, writing must be so construed as to give effect to their general intent and so as to avoid absurdities.

As instrument of credit, warehouse receipts play an important role in modern commerce and the present day tendency of the courts is towards a liberal construction of the law in favor of bona fide holders of such receipts.

A warehouseman deposited merchandise in his own warehouse, issued a warehouse receipt therefor and thereafter negotiated the receipt by endorsement. The receipt recites that the goods were deposited "por orden" of the depositor, the warehouseman, but contained no statement that the goods were to be delivered to the bearer of the receipt or to a specified person. It was in the form of a negotiable warehouse receipt and was not marked "nonnegotiable" or "not negotiable." Held: That, the receipt was a negotiable warehouse receipt and that the words "por orden" must be construed to mean "to the order."

A chattel mortgage was taken by a bank upon the goods previously transferred to the same bank by warehouse receipt. Held: That, under the circumstances of the case, the chattel mortgage did not work a novation of the warehouse contract between the parties and that the bank might still insist on the rights acquired by it under warehouse receipt.2. [G.R. No. 119231. April 18, 1996.],PHILIPPINE NATIONAL BANK, petitioner, vs. HON. PRES. JUDGE BENITO C. SE, JR., RTC, BR. 45, MANILA; NOAH'S ARK SUGAR REFINERY; ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T. GO, respondents.

The source of conflict herein is the question as to whether the Philippine National Bank should pay storage fees for sugar stocks covered by five (5) Warehouse Receipts stored in the warehouse of private respondents in the face of the Court of Appeals' decision (affirmed by the Supreme Court) declaring the Philippine National Bank as the owner of the said sugar stocks and ordering their delivery to the said bank. From the same facts but on a different perspective, it can be said that the issue is: Can the warehouseman enforce his warehouseman's lien before delivering the sugar stocks as ordered by the Court of Appeals or need he file a separate action to enforce payment of storage fees?

Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its claim for payment or delivery of the sugar stocks. The unconditional presentment of the receipts by the petitioner for payments against private respondents on the strength of the provisions of the Warehouse Receipts Law (R.A. 2137) carried with it the admission of the existence and validity of the terms, conditions and stipulations written on the face of the Warehouse Receipts, including the unqualified recognition of the payment of warehouseman's lien for storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks without paying the lien due private respondents as warehouseman.

While the PNB is entitled to the stocks of sugar as the endorse of the quedans, delivery to it shall be effected only upon payment of the storage fees. Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the possession of the goods without requiring payment of his lien, because a warehouseman's lien is possessory in nature.3.G.R. No. L-25748. March 10, 1975.],CONSOLIDATED TERMINALS, INC., plaintiff-appellant, vs. ARTEX DEVELOPMENT CO., INC., defendant-appellee.

As operator of a customs bonded warehouse at Port Area, Manila, plaintiff-appellant received on deposit in behalf of the consignee 193 bales of cotton. Subsequently, defendant-appellee obtained delivery of the bales allegedly by virtue of a forged permit to deliver imported goods issued by the Bureau of Customs. Plaintiff-defendant then commenced a replevin suit against defendant-appellee, which was later amended into an action for damages. Defendant-appellee moved for dismissal and the lower court dismissed the complainant for lack of cause of action. Forthwith, plaintiff-appellant appealed to the Supreme Court, contending that as warehouseman it was entitled to the repossession of the merchandise and that defendant-appellee acted wrongfully in depriving it of possession by presenting a falsified delivery permit.

Section 10 of the Warehouse Receipts Law provides that where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them, it shall be liable as for conversion to all having a right of property or possession of the goods.

Since the real parties interested in the recovery of the bales of cotton in the case at bar are the depositor, consignee and shipper, the warehouseman has no cause of action in seeking recovery of damages for the non-delivery of said bales.

It would be different if the depositor, consignee and shipper had required the warehouseman to pay damages, or that the Commissioners of Customs and Internal Revenue had held it liable for the duties and taxes. In such a case, the warehouseman might logically and sensibly go after the party wrongfully obtaining custody of the merchandiser.

Where a complaint does not unequivocally allege what right was violated, or what delict or wrong was committed, no valid judgment can be rendered thereon (See Ma-ao Sugar Central Co., Inc. vs. Barrios, 79 Phil. 666; 1 Moran's Comments on the Rules of Court, 1970 Ed., pp. 259, 495).4.[G.R. No. L-4080. September 21, 1953.],JOSE R. MARTINEZ, as administrator of the Intestate Estate of Pedro Rodriguez, deceased, plaintiff-appellant, vs. PHILIPPINE NATIONAL BANK, defendant-appellee.

Where a warehouse receipt or quedan is transferred or endorsed to a creditor only to secure the payment of a loan or debt, the transferee or endorsee does not automatically become the owner of the goods covered by the warehouse receipt or quedan but he merely retains the right to keep, and with the consent of the owner to sell, them so as to satisfy the obligation from the proceeds of the sale, this for the simple reason that the transaction involved is not a sale but only a mortgage or pledge, and if the property covered by the quedans or warehouse receipts is lost later without the fault or negligence of the mortgagee or pledgee or the transferee or endorsee of the warehouse receipt or quedan, then said goods are to be regarded as lost on account of the real owner, mortgagor or pledgor.TRUST RECEIPTS LAW

"Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of Presidential Decree no.115. No further formality of execution or authentication shall be necessary to the validity of a trust receipt. Parties to a Trust Receipt

"Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement.

"Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person.

A trust receipt may be denominated in the Philippine currency or any foreign currency acceptable and eligible as part of international reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary notwithstanding: Provided, however, That in the case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate on the date the proceeds of sale of the goods, documents or instruments held in trust by the entrustee are turned over to the entruster or on such other date as may be stipulated in the trust receipt or other agreements executed between the entruster and the entrustee.Rights of Entruster

The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt;

or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree

Obligations of Entrustee The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of PD 115.

Who bears liability in case of loss

The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.

G.R. No. 159622. July 30, 2004. LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE, petitioners, vs. METROPOLITAN BANK & TRUST COMPANY, respondent.

The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an additional layer of security to the lending bank. Trust receipts are indispensable contracts in international and domestic business transactions. The prevalent use of trust receipts, the danger of their misuse and/or misappropriation of the goods or proceeds realized from the sale of goods, documents or instruments held in trust for entruster banks, and the need for regulation of trust receipt transactions to safeguard the rights and enforce the obligations of the parties involved are the main thrusts of the Trust Receipts Law.The second paragraph of Section 7 provides a statutory remedy available to an entruster in the event of default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee. More specifically, the entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time. The law further provides that the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.

G.R. No. 122539. March 4, 1999.JESUS V. TIOMICO, petitioner, vs. THE HON. COURT OF APPEALS (FORMER FIFTH DIVISION) and PEOPLE OF THE PHILIPPINES, respondent

The Court has repeatedly upheld the validity of the Trust Receipts Law and consistently declared that the said law does not violate the constitutional proscription against imprisonment for non-payment of debts. The case of People vs. Nitafan held: "The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner or not. The law does not seek to enforce payment of a loan. Thus, there can be no violation of the right against imprisonment for non-payment of a debt."[G.R. No. 90828. September 5, 2000.]MELVIN COLINARES and LORDINO VELOSO, petitioners, vs. HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE PHILIPPINES, respondents

There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to "return" it (devolvera) to the owner. 4 | Page

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